TO GO WITH YOUR GUT or not to go with your gut? That is the question CEOs must ask themselves when assessing alliances with would-be competitors in an environment that demands quick decision-making with relatively little information. It’s an unscientific approach, to say the least, but it just might be the best protection when meeting with CEOs of other firms to discuss partnerships that involve sharing sensitive information such as R&D or marketing plans.
We asked CEOs of a diverse group of companies to reflect on their experiences with such alliances and tell us: 1) how the accelerated environment has changed the partnership process; 2) how they unveil just enough information to show their strengths, while simultaneously protecting their intellectual property and internal strategy; and 3) whether they’ve had to deal with the unfortunate task of unwinding a partnership gone bad. Here’s what they had to say.
Former President and CEO
AT&T Business Solutions
AT AT&T, IT’S NOT AT ALL UNUSUAL to have very complex relationships with firms that are simultaneously our customers, suppliers, and competitors. In the past 12 months, we’ve entered a variety of strategic business relationships with a number of companies. These range from go-tomarket alliances with well-known companies such as Hewlett-Packard and Sun Microsystems, where we couple what we each do best with our respected brand names, to deeper relationships with up-and-coming but lesser-known companies such as Net2Phone, Tellme Networks, and OnsiteAccess, where we’ve taken equity stakes in the firms.
We evaluate many more relationships than we actually enter, but the basis for each must be the potential value for our respective owners. Since we’re guided by our shareholders’ ROI, it’s fairly routine for us now to establish limits on what our alliance partners need to know-and when. For instance, as we begin doing business with another firm, it’s common practice to safeguard sensitive, proprietary information until we have had the opportunity to get a measure of one another. For our mutual protection, we usually bind our understandings about sharing intellectual property or market strategy in non-disclosure agreements.
When I speak with these other CEOs, we usually understand the limits of what we can share prior to reaching the contract stage.
President and CEO
Internet Capital Group
THE NATURE of your relationship with your potential partner/competitor will dictate how deep and how far you go in terms of sharing important information. If it’s more of a top-level relationship, then I think you’ll stay at a fairly high level. But if you’re trying to build something that’s fundamentally important for both sides, over time you’re going to need to share relative information. So, I think it’s really a function of what you’re trying to get out of it and what the end-goal is. It’s also a function of how willing to share you feel the other partner is. It’s a give-give situation and if one’s not giving, the other shouldn’t. I really think the most important thing is what you’re trying to accomplish.
I’ve had partnerships that didn’t work as well as we would have liked. Some of the reasons were that the commitment at the senior level was there, but the commitment at the middle levels and lower levels to drive the partnership and relationship was lacking. You need to have a complete buy-in for the partnership on both sides-it can’t just be at the CEO level.
Founder and CEO
The Interactive Resource
POTENTIAL COMPETITORS are also potential partners. If they’re in the same business as you, you might learn from them or they might learn from you or you might potentially merge down the road. In the Web business especially, it’s better to be open than not. Many opportunities are created by companies that have the same idea, they’re on a parallel track, and they like each other enough to join forces.
When I meet with competitors, I generally approach them from the standpoint that there’s plenty of business out there for everybody. If you’re doing what I’m doing, that’s great because it proves my model and validates my business. We might have different perspectives, so let’s share those without violating any personal information that might hurt the business or make somebody feel uncomfortable.
It’s advantageous to discuss pretty frankly the positive and negative aspects of your business, and having strategic partners is definitely the way to go right now. Not everybody is good at every single thing and if you pick your niche and you’re great at it, your customers are going to be loyal to you. If your competitor also has the same niche with overlapping customers, then you can’t prevent that. You should feel slightly competitive but not unrealistically competitive.
I think the marketplace is such that people aren’t out to kill each other anymore; it’s more of a collaborative environment and the Web businesses have proven that partnerships usually pay off more than rivalries.
Chairman and CEO
IT’S TOUGH TO HAVE PARTNERSHIPS with competitors. Our partnerships are with complimentary service providers. For example, I have partnerships with Cap Gemini, E&Y, Cisco, and Hewlett-Packard in which we go to market together in a way that complements one another. I don’t make products that Cisco does and Cisco doesn’t provide the infrastructure services that we do. The same can be said with Cap Gemini. I need their expertise to develop systems and provide integration services for our major enterprise customers, but they don’t do the operations that we do with our network business.
We work very well with complementary businesses and, to an extent, we need to cooperate with competitors because we mutually scale the Internet backbones. We work very carefully with competitors to manage the amount of information we give each other for our mutual benefit, which is ultimately for the customer’s benefit. A lot of our arrangements deal with expanding network interconnections so traffic flows smoothly from one Internet backbone to another. We do that by collaborating with traffic forecasts, and we are very specific about what we expect from each other.
If you both have the same objective in mind-especially winning customers’ business or market share-you’re going to be at loggerheads all the time. We had a major partnership with a telecommunications company that appeared to be complementary, but then they decided to compete with us. By doing so, it really broke the nature of the relationship.
That’s why we look at the firm’s strategic intentions and recognize that those can change over time. When we look at partners, we say, “What is their core business?” If they’re product companies, professional services companies, or software companies and that’s going to be their core business, then those complement us. If we see firms saying “Gee, I really want to operate a network a la Genuity,” the alarm bells go off and we steer away from them.
President and CEO
IT CAN BE TRICKY. You have to decide whether it’s the right time. On the other hand, just knowing some body else’s strategy usually isn’t enough to give a competitor a competitive advantage. Hopefully, a company has developed a strategy that plays to its strengths and, if properly executed, confers some kind of competitive advantage. But it’s got to draw on the strengths of that company because 20 percent of the job is strategy and 8o percent is execution. The fact that I know a company’s strategy doesn’t help me beat it in a competitive marketplace. And venture capitalists, for the most part, don’t bet on technology, they bet on management teams.
If we enter into a relationship with other parties and find they can’t be trusted, we end the relationship. In a way, the trust factor is the ante. But these days, when so much is happening quickly, you’re under pressure to make decisions faster. You have to make decisions with less and imperfect information; you’ll make mistakes and the key is to correct mistakes rather than let your ego get caught up in the decision, if it’s a wrong one.
Quite a few years ago, I made mistakes because I wanted a deal to work so badly. I felt it was so good, and it made so much sense on paper, that I failed to pick up on indications that the personality fit was not going to work. That ended up being fatal. It was not a good investment, not a good deal. But, you make those mistakes and you recover from them.
The mistakes occur more often around the people than around the business. I’ve had investors earlier in my career who invested in my company or the company I was running. At the end of it, they said, “Look, we hear your strategy, we understand what you’re trying to do. The one thing we’re absolutely sure about is that your strategy will need to change as events unfold because you can’t predict the future. But what we’re really banking on is that you’ll have the foresight to see that and evolve your strategy in the face of a changing market.” What they’re betting on is you.
THIS IS A BUSINESS BUILT AROUND SPEED, relationships, and creativity. It’s like driving a race car as opposed to driving a slow-moving vehicle. On the relationship side, if you’ve been introduced to someone, a friend of a friend, or a business relationship of a business relationship, those are the deals in which you’re more likely to be open about what’s under the kimono. peeling The process of back the layers of a potential partner becomes a dance, an incredibly quick dance. It means you’ve got to use judgement second by second.
Unfortunately, there are many horror stories of managers who get ideas ripped off-and it’s not just from partners. It’s from the press or potential funders. You need to be exceptionally careful. For instance, we went into our first meeting with a potential investor and didn’t really know them very well at all. They asked us a series of very sensitive and revealing questions before we had a chance to understand the rules of the game we were playing with them. We said we would prefer to answer those questions after we understood what both our strategies were for being in the meeting. After that, the senior person from the fund got up, walked out, and never came back.
There are a lot of egos involved, whether it’s on the funding side or on the corporate side. And the egos can sometimes get in the way of making good business decisions. One of the difficulties and challenges is to make sure the business comes before the ego. If you’re able to do that, you’re doing service to your shareholders. If the ego comes first, then you’re not always going to make the right decisions.
President and CEO
IF YOU CAN FIND THE COMMON INTEREST, you have a basis of trust to go forward and discuss possible scenarios. Generally, we try to find a toe-in-the-water project to start a relationship. When Inforonics begins working with a company and there’s success, then there’s quite a bit of trust leftover for both parties. After that, we can be more open about the opportunities and the strengths and weaknesses of the partnership.
But you can get yourself too deep into a situation and place trust improperly. You can do that by moving too fast and by not going with your gut. I think that in a lot of cases, it has a lot to do with the people on the other side and whether you trust them. That tends to be very reliable-at least I’ve found it to be reliable.
We’ve never had a messy divorce. But we’ve had lots of partnerships that didn’t bear fruit and lots of attempts to create alliances. I think the key thing that companies have to do in the current environment is create alliances. Inherent economic forces are in place now that are causing companies to aggregate into group units of some type and that are, in some cases, causing them to split apart and change their function entirely. The boundaries of companies are changing and being reorganized.
President and CEO
ON THE DOT-COM SIDE, everybody’s talking about how to position the company better and secure success by looking at mergers. We’ve considered mergers to the extent that they reduce our burn rate, diminish our overhead, and create further synergies for our business model. There’s a balance. We would continue looking at a merger if we thought going into it that it could create enough value for us.
Now that the market is more accelerated, I think it takes a shorter period of time to develop these partnerships. Before, everybody talked about making decisions very quickly and growing fast. But now we’re falling apart quicker. Everybody is saying, “Okay, our first models didn’t work, what are the alternatives? What should we be looking at-mergers, acquisitions, or partnerships with offline companies?” It really depends on the particular company.